Why is it still important for family members to have an employment contract?

There are many reasons why a family member may be invited to be part of a family business, including an inherent level of trust and commitment, and building the brand of a business as being associated with family values. Furthermore, family members may join the business as part of a succession plan, ensuring continuity and grounding the business’ future.

However, it is important for the managers of a family business to ensure that there is no undue preferential treatment of family members, as this has the potential to sow discord amongst the rest of the workforce. While it is not an offence to hire family members in preference of other applicants for a certain role, promoting or advancing the careers of family members unmeritoriously, while failing to promote or reward other employees for hard work and good results could cause a downturn in morale, a lack of commitment to the business and losing key employees who feel that they are unable to progress their career with the business. Not only does the business risk poor performance by elevating to a managerial role a family member who is unsuited to the position and unable to effectively carry out its responsibilities, but the business will also incur recruitment costs if there is a significant turnover in disaffected staff.

In order to ensure that the business runs smoothly and morale is maintained, while also incorporating the benefits of input from family members, it is important to put in place clear procedures and policies with regards to management hierarchies, promotion and reward. Examples of this are clearly establishing as polices of the business the criteria for promotion and the responsibilities that are associated with each role. The transparency that this creates can assist with setting the expectations of employees. The business should be conscious that once such policies have been implemented and made available to the employees, it is important that the business upholds and abides by them so as not to risk losing the trust of its workforce. Furthermore, the decision making process of family business will often be informal and may be the purview of a few people at the top of the business to the exclusion of other stakeholders and other people in management positions. There is a commonly held perception of family business that key decisions are made around the dinner table by a select few individuals without following any formal policies or procedures. This can cause serious issues where the business is a company and decisions are made without the attendance of the requisite number of directors, or where decisions are made without consulting employees of the business who have expert knowledge and can help managers make informed decisions. For this reason, a clearly defined decision making procedure should be established so that decisions are made in the best interests of the business and employees are made to feel involved in its growth and direction. 

Family disputes are often unforeseeable and difficult to predict. Family members may enter in to business based purely on good faith and loyalty without any expectation of relationships breaking down and as such will often forego the formality of written employment contracts. The difficulties this poses become glaringly obvious when there is a disagreement as to how to run and grow the business or when family members marry, divorce or have opposing viewpoints over the direction of the business and succession planning. Those wishing to, or forced to, leave the business without any statement of terms and conditions in place will no doubt rely on conversations and promises that may have happened years previously and/ or the pattern of conduct during their time with the business. Failure to provide an employee (including family members) with a statement of terms and conditions can entitle them to claim up to 4 weeks’ pay from the organisation for failing to do so, alongside any other claim that they may have.

Likewise owners of the business will have little protection if the family member sets up a rival business, seeks to poach staff and target customers, unless the necessary protections are included in a contract.  They are unlikely to agree to such terms when the relationship has turned sour!

Unlike an ordinary breakdown in employment relations, breakdowns in family situations leave deeper wounds. Such individuals often have heightened emotional investment in the business and the breakdown of familial goodwill can lead to greater animosity and more entrenched positions than if the parties were unrelated, making settlement more difficult and often more expensive to resolve.

Ideally, the terms of employment for family members would be set out in an employment contract prior to the employee commencing work with the business, as is the case would be for any unrelated employee. This assists the parties to more easily assess their respective situations when a dispute arises and helps them to more readily avoid breaches of contract that could form a head of claim. Most employment contracts will contain a procedure expressly stating the required method of departure of any employee, regardless of whether they are a family member or not.  This clear expression of terms helps facilitate a more amicable exit of a family member from a business, determine reasonable settlement terms and preserve family relationships by reducing the likelihood of litigation.

Family members will often also be stakeholders in the business (e.g. if the business is an incorporated company, family members may be shareholders) and this can complicate the resolution of disputes, especially if the business has adopted an informal approach to management. If a dispute arises between family members, this may result in deadlock and an inability to make key business decisions swiftly and effectively. For this reason, a policy that establishes the management hierarchy of the business should be clearly set out so that there is no ambiguity as to who manages the company and assumes the position of employer, and who would be considered an employee. Where family members are both shareholders and employees of the company, a shareholder agreement should be entered into in order to clearly define each member’s responsibilities and obligations to their fellow shareholders.

For more information on implementing workplace policies and procedures in your family business, or the drafting of employment contracts, please contact the Lupton Fawcett Employment team on 0113 280 2203. For shareholders agreements, please contact the Corporate team on 0333 323 5292.